Mortgage
Definition
A loan secured by real estate property where the borrower repays the principal and interest over a set term (typically 15 or 30 years). The property serves as collateral for the loan.
A mortgage is the largest loan most people will ever take. It enables homeownership by allowing you to purchase a property with a fraction of the price as a down payment, then repay the balance plus interest over 15 to 30 years. The property itself serves as collateral — if you stop paying, the lender can foreclose and sell the property to recover the loan balance.
The two main types are fixed-rate (the interest rate stays the same for the entire loan term) and adjustable-rate (ARM — the rate adjusts periodically based on market conditions). Fixed-rate mortgages provide payment predictability; ARMs offer lower initial rates but risk future increases.
Mortgage payments consist of four components (PITI): Principal (reducing the loan balance), Interest (the cost of borrowing), Taxes (property taxes held in escrow), and Insurance (homeowner's insurance held in escrow). If your down payment is less than 20%, private mortgage insurance (PMI) is an additional component.
Amortization means early payments are mostly interest, with the principal portion increasing over time. On a 30-year $400,000 mortgage at 7%, your first payment might be $1,900 interest and $762 principal. By year 20, it flips to roughly $900 interest and $1,762 principal.
Mortgage rates are influenced by the Federal Reserve's interest rate policy, bond market conditions, your credit score, LTV ratio, and loan type. Even a 0.5% rate difference on a large mortgage can cost or save tens of thousands of dollars over the loan's life, making rate shopping essential.
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Related Terms
Frequently Asked Questions
Is a 15-year or 30-year mortgage better?
A 15-year mortgage has lower total interest cost and lower rates but higher monthly payments. A 30-year has lower payments but costs much more in total interest. If you can comfortably afford the 15-year payment, it saves significantly. If the higher payment would be a stretch, the 30-year provides flexibility.
How much house can I afford?
A common guideline is that your total housing cost (mortgage, taxes, insurance) should be below 28% of gross income, and total debt payments below 36%. On a $100,000 income, that's roughly $2,300/month for housing, which supports approximately a $350,000-$400,000 home depending on rates and down payment.